Who owns the West? Drillers and Environmentalists wage a war of statistics

Drillers and Conservation groups both have statistics to back up their claims.

To hear oil and gas industry folks tell it, in the last three years drilling on public lands has been choked off by cumbersome new rules and bureaucratic red tape from the Obama administration.

Conservation groups, on the other hand, say the last three years represent a rebalancing of variety of public interests, after a frenzy of leasing and drilling approvals in the final months of the Bush administration that led to a volley of legal challenges.

Both sides have statistics to back up their claims. The Western Energy Alliance, an oil industry trade group, points to a 39 percent decline in drilling permit approvals since 2008. The Wilderness Society counters that oil and gas production is up on federal lands.

The fact that the two sides can rummage through the data, collected by the federal Bureau of Land Management, and come to different conclusions is a testament to the power of advocacy and the suppleness of numbers.

So what is really happening on the plains, mesas, deserts and forests of the West? Just as the numbers seem to swing from side to side the truth doesn’t reside in a single place.

While it has gotten harder to drill on public lands much of the decline in activity in the West has to do with operational and economic issues – such as the 70 percent plunge in the price of natural gas.

To get a better understanding of what is really going on requires unpacking the numbers and so: Reader Alert – there are a lot of numbers coming.

But first let’s start at the beginning.

During the administration of former President George W. Bush there was great pressure on the BLM to expedite oil and gas drilling on public lands.

That pace quickened in the administration’s final year. In the fall 2008, BLM approved six resource management plans in Utah that opened the way for the sale of 77 leases, covering 130,225 acres in December and in Colorado it opened 52,000 acres of the iconic Roan Plateau to drilling.

Both decision ended-up in protracted lawsuits filed by environmental groups.

With less than a week left in office, the Bush administration issued a leasing plan for commercial oil-shale development.

When former Colorado U.S. Senator Ken Salazar took over as President Obama’s interior secretary he immediately announced that the oil-shale rule would be reviewed.

“We are going to take a look at all the midnight actions of the Bush administration and see what needs to be changed,” Salazar declared. The oil-shale rules were eventually rolled back.

Then the oil and gas leasing rules were overhauled adding a few steps – including an environmental assessment and public comment before acreage is even auctioned. The goal was to reduce the administrative protests and lawsuits that followed almost every lease sale in the West, bureau officials said.

The result of all this, and here is where we get into the glass being half-full, half-empty or bone dry, is that:

“It has gotten more difficult and costly to operate on public lands” said Kathleen Sgamma, vice president of government affairs at the Western Energy Alliance, which represents 400 western oil and gas companies.

Or

“This is a balancing act, oil and gas drilling isn’t the only activity on public lands,” said Nada Culver, senior counsel for the Wilderness Society’s BLM Action Center. “This has been an exercise to get things back in balance.”

Who is right? What do the statistics say?

After reaching a peak of 2,818 parcels offered at sale in 2006 the number of sale parcels slide to 668 in 2011 – a 76 percent drop.

The leasing process starts with oil and gas drillers nominating parcels for sale at auction and the number of nominations by the industry spiraled from 3,024 in 2007 to 566 in 2011, so it isn’t surprising that there were fewer parcels for sale by 2011.

And this is all the fault of regulations? Well there were a few other things happening.

At the beginning of 2006 the price of natural gas was $10.62 per million British Thermal Units and that price kept rising hitting a peak of $13.50 in July 2008.

Then came the financial melt down and the worst recession since the depression of the 1930s and in September 2009 the spot price of natural gas hit $2.50 a million BTUs – an 81 percent decline.

By April 2012 the price had bottomed at $1.91, a ten-year low.

Most of the reserves on public land in the West – certainly for Colorado, Wyoming and Utah – are for natural gas, not oil. So the decline in natural gas prices fell heavily on the region.

It costs money to produce natural – this is called the lifting cost – and it doesn’t pay to drill and produce if you can’t cover the lifting costs.

The 2010 average break even costs in Wyoming’s Pinedale field in 2010 was $4; in Colorado’s Piceance basin $5; and Utah’s Unita Basin $4.50, according to a study by Science Applications International Corp., AIC, an engineering and technology consulting firm.

The lowest cost operators have lifting costs less than half of those averages. Still, the economic environment was not favorable to western production.

At the same time that the West was struggling, new natural gas plays, such as the Marcellus shale in Pennsylvania and New York and the Barnett in Texas, were opening up, and drilling rigs were moving into these new reserves closer to big markets.

Also while leases on federal lands have a 10-year term, private lease are usually for three to five years, so there is more pressure to drill on these.

And so, between the last quarter of 2008 and the start of 2012 the number of rigs in the Marcellus rose from 8 to 124, according to data from Rigzone and the energy investment bank Tudor, Holt Pickering & Co.

During the same period, rigs operating in Wyoming’s Green River Basin, Utah’s Unita Basin and Colorado’s Piceance rigs dropped by 135 to 91.

New pipelines such as the Rockies Express from Wyoming to Ohio and the Ruby Pipeline to Oregon have helped close that gap. But on August 9th natural gas from the Opal, Wyoming hub was selling on average for $2.75 for a million BTUs, 11 cents less than at Louisiana’s Henry Hub.

Eleven cents may not sound like much, but when you are selling billions of BTUs of natural gas it can add up to real money.

So while the statistics show that for Utah, Montana, Wyoming, Colorado and New Mexico drilling permits issued between 2008 and 2011 were down 36 percent to 3,680 and the number of parcels leased dropped to 393 from 1,879 – there are suite of factors that impact those numbers.

And then there is North Dakota. A rich shale oil deposit was discovered in the state’s Bakken formation and that has spurred a drilling rush on both public and private land as oil prices continue to be strong.

In the last four years 275,824 acres of federal land was leased in the Bakken is just a shade under the acres in the four previous Bush years and the number of drilling rigs has jumped to 207 this year from 53 in 208.

“Total oil production from federal lands and waters has increased 13 percent during the first three years of this Administration, compared to the last three years of the previous Administration,” BLM spokesman Blake Androff, said.

One thing both sides do agree upon is that between 2008 and 2011 natural gas production on federal land has declined 4 percent. The Wilderness Society calls that “levels comparable” to the Bush administration.

The Western Energy Alliance points out that while production down 4 percent on public lands it is up 29 percent on state and private land. But again there are a lot of variables go into that difference.

As a result of North Dakota’s Bakken oil production is rising on public land, though at half the rate as on private and state land the Western Energy Alliance notes.

The Wilderness Society, in part to counter industry statistics, last month issued is own analysis “Making the Grade,” in which they offer a set of statistics to show things are just fine.

Among the points the study makes in that while it is true the number of parcels leased is down so are the number being nominated by industry – so that the percentage of offered parcels leased leased parcels is up.

And the battle over those leases has cooled, according to The Wilderness Society. Between 2007 and 2009 environmental groups filed administrative protests on nearly three-quarters of the 5,054 parcels sold in Utah, Colorado, Wyoming and New Mexico. The average in 2012 was down to 12 percent. The BLM calculates it as 15 percent.

What that means is that there is less likelihood of protracted battles over a sale such as the 42-month, still-going-strong fight over 55,000 acres of leases issued on Colorado’s Roan Plateau.

“That shows that the process is working, that by doing the work up front you avoid protests on the sales,” said the Wilderness Society’s Culver.

So everything’s fine? Not so fast.

The leasing process has become more complicated. Leasing is based on a “Resource Management Plan” done by the BLM that designates areas available for oil and gas development. Drillers used to look at RMPs and based on their knowledge of the area nominate parcels.

Now many of the RMPs are being revised after decades and the BLM has deferred some lease nominations – sometimes at the last minute – until the new RMPs are in place, making it difficult for a company to plan.

The BLM as part of its reforms has added a new analysis more focused that the RMP – Master Leasing Plans. This will make leasing and permitting quicker in lease plan areas, agency officials and environmentalists say.

If it works that way fine, but people in the industry fear it will be just one more tricky, bureaucratic hoop.

The BLM has already added three more steps: an earlier public notice of nominations, a review by an interdisciplinary team and an environmental assessment before the nominated land goes to auction. In the past, an environmental assessment wasn’t done until a parcel was sold.

“The Bureau of Land Management’s leasing reforms focus on making oil and gas leasing more efficient and predictable, increasing certainty for stakeholders – including industry – and restoring needed balance with comprehensive front-end analysis prior to leasing and development,” the BLM’s Androff said.

Once an operator gets a lease it is long slog to get a drilling permit. In 2011, it took as long as 307 days to obtain a drilling permit or APD, according to BLM data. That compares to less than 30 days to get an APD from the Colorado Oil and Gas Conservation Commission.

The BLM says that three-quarters to that time is “days waiting on operator,” but that belies what is really happening.

“You file an application which, from experience, you think is complete and a month down the road you get a letter saying you’ve got the change something,” said Dave Banko, whose company Banko Petroleum Management handles permitting for drillers. This process can repeat itself several times.

“If there is any pressure, any controversy, the BLM just tells you to go get them another rock,” Banko said.

In April, the BLM and Interior Secretary Salazar, conceding there is a problem with permitting, announced an online permitting system to cut to 60 days the time it takes to get an APD.

The system, which had been operating in the past, will be back up by May 2013. Bank said that while welcomed “it will cut days, not weeks off the process.”

Added to all this is a new proposed rule to regulated hydraulic fracturing, the process that puts water, sand and trace chemicals down a well under pressure to crack rock and release oil and gas, on BLM land.

All the drilling companies currently have to comply with state fracking regulations, but the BLM rules would apply on federal lands. “The industry has changed,” said Ann Morgan, regional director of the National Wildlife Federation. “Horizontal drilling, more intense fracking have changed the industry. It is necessary to consider new rules.”

One can argue the merits of having two fracking rules in Colorado or Wyoming, but problematic rules make an easy target for critics. This has been a long road, but I’m going to journey into the weeds a bit here

One of the rules in the draft BLM regulation would require and inspection of the cement job on a well before it proceeds to fracking and production.

A rig drills the wellbore and then surface casing, or pipe, is slid down to cover the zone in which there might be drinking water aquifers. Cement is poured around the casing, another sleeve of casing is added and another coating of cement.

A sonic device is lowered in the well that sends out “pings” and records the thickness of the cement, creating a “bond log,” which shows how well the cement adhered to the casing. The cement job is vital to the integrity of the well and shielding the surrounding environment.

Under the initially BLM proposal it looks like a well could not proceed until the cement job was certified by an inspector. But how long will that take, particularly with wells spread over large areas?

The prospect of a job idling, with tons leased equipment just sitting, until an inspector arrives would, operators say, make operating on public land risky if not impossible.

Finally, while administrative protests are down region-wide, in Colorado 90 percent of leases are still protested – a sign that at any time a driller could get snared in a long legal battle.

“Everything has gotten more political,” said David Ludlum, executive director of the West Slope Colorado Oil and Gas Association.

And I’m just going to skip the sage grouse issue, because life is too short and this blog post is too long. Some other time.

So, where does that leave us? It has gotten more difficult to drill on public lands, but has that driven drillers off?

If anything, the current market conditions are masking the regulatory changes out West. When natural gas prices do rise and Western drilling revives that’s when the impact of the changes will be seen and that is likely why the industry is making a big issue of them now.

After working through all the numbers it looks as though some of the industry criticism isn’t economic, but purely political blasts against the Obama administration. But like Ludlum said everything has gotten more political.

“Trying to operate on public land has gotten more complicated, more expensive, more uncertain,” said the Western Energy Alliance’s Sgamma. “Every business needs some certainty.”

But the Wilderness Society’s Culver responds: “What they are saying is ‘we shouldn’t have to worry about air quality or water quality.’ It is public land not industrial land.”

For the environmentalists the rules and regulations are “the cost of doing business on public land.” But make the costs high enough there is no business.

“This is the challenge,” Culver said. “It is multiple use land and everyone wants their use to be the use.”